Ensuring Access to Affordable Medication: The Supreme Court’s Opinion in F.T.C. v. Actavis, Inc.

Posted

 by Ralph B. Kalfayan* and Vic A. Merjanian**

I. Introduction

The Supreme Court of the United States, in its majority opinion in Federal Trade Commission v. Actavis, Inc., expanded consumers’ access to more affordable healthcare.[1]  It did so by stripping brand name pharmaceutical companies of virtual immunity from antitrust scrutiny when they enter into agreements to pay generic pharmaceutical companies to postpone competition – typically for years. The majority correctly held that district courts should analyze the anticompetitive consequences of such “reverse payment” settlements for consumers and the general public.

“Reverse payment” settlements resolve “…patent infringement disputes by obliging the patent owner to pay compensation to the alleged infringer in return for the infringer’s agreement to refrain from producing or selling the allegedly infringing product for an agreed period ending on or before the expiration of the patentee’s patent.”[2] Such settlements became popular in the wake of the Hatch-Waxman Act[3] which “amended the Federal Food, Drug, and Cosmetic Act, 21 U.S.C. §§ 301-399, to permit a potential manufacturer of a generic version of a patented drug to file an abbreviated application for approval with the FDA”[4] or “ANDA” (Abbreviated New Drug Application).  An ANDA applicant may “rely on the FDA’s prior determinations of safety and efficacy made in considering the application of the patented drug.”[5]  In an ANDA the potential manufacturer of the generic drug must certify that, in its opinion and to the best of its knowledge, the drug it proposes to manufacturer does not infringe any patent listed with the FDA as covering the patented drug.[6] The manufacturer can satisfy this requirement by “certifying […] that such patent is invalid or will not be infringed by the manufacture, use, or sale of the new drug for which the application is submitted.”[7]

Upon the filing of an ANDA, the patent holder has 45 days to file suit – based on the ANDA filing as the infringement act[8] – to trigger an automatic 30-month stay of any approval of the ANDA.[9] The FDA may not approve subsequently filed ANDAs for a period of 180 days after the generic that is the first to file has launched the drug product or the court hearing the infringement suit enters a decision holding the relevant patent invalid, unenforceable or not infringed.[10] This 180-day exclusivity period provides a potentially powerful incentive to become the first manufacturer to file an ANDA – by some estimates, millions and perhaps billions in profits.[11] Congress built this incentive into the Hatch-Waxman Act to increase competition by manufacturers of generic drugs and thereby “…make available more low cost generic drugs.”[12]  Without doubt the 180-day exclusivity period has provided an incentive to become the first manufacturer to file an ANDA.  But in many instances this does not result in increased competition or greater availability of low cost generic drugs.  Rather, it results in a “reverse payment” settlement whereby the brand name manufacturer shares its monopoly profits with the generic manufacturer–a clear win to both companies and a devastating multi-billion dollar loss for the very consumers that both the Hatch-Waxman Act and the Sherman Antitrust Act were designed to protect.

 When confronted with antitrust challenges to “reverse payment” settlements, lower courts have struggled with whether patent law precludes antitrust scrutiny, and if not, the nature of that antitrust scrutiny.  In Federal Trade Commission v. Actavis, the Supreme Court held that patent law does not preclude antitrust scrutiny and that courts should undertake that scrutiny under the “rule of reason.” This article explains why this decision to reject antitrust immunity for these transactions is essential to remove a serious obstacle to competition in our pharmaceutical markets.

II. The Intersection of Antitrust and Patent Law

 The American patent system seeks to “reward inventors and thereby encourage innovation” while simultaneously “induc[ing] inventors to publicly disclose their discoveries.”[13] It does so, however, through a non-adversarial, administrative process run by an understaffed patent office overwhelmed with applications. Inevitably, the patent office grants patents that do not meet the requirements of the Patent Act.  Granting such patents does not encourage innovation­–indeed challenging them would. [14]   But challenging patents can prove expensive and risky. Apparently not content with the rate at which generic drug manufacturers were challenging patents, Congress offered, via the Hatch-Waxman Act, 180-day exclusivity to the first generic manufacturer to mount a successful challenge.[15]

But the purpose of encouraging such challenges was not to induce patent holders to share their monopoly profits, it was to generate price competition.  “Reverse payment” settlements can postpone such competition and thus frustrate the function of the Hatch-Waxman Act.  This would also frustrate the purpose of the Sherman Antitrust Act[16] and California’s Cartwright Act, which have peacefully coexisted with patent law for almost a century.  At some point, our antitrust laws and patent laws overlap though they both seek to encourage innovation and competition. The majority recognizes this properly in AndroGel, while the dissent’s perspective is that patent law should wholly trump antitrust law without any effort to harmonize the two regimes.

                        Majority’s View[17]                                                                         Dissent’s View[18]

The majority opinion, in holding that reverse payment settlement agreements must now withstand rule of reason analysis to ensure compliance with antitrust and consumer protection laws, will actually increase innovation, benefit consumers, and strengthen our patent system.

III. The Significance of Pay-for-Delay and its Market Implications

While the Hatch-Waxman Act was intended to create incentives for generics to enter the market and thus increase competition and reduce the cost of pharmaceutical drugs, ironically it has prompted deals to keep generics off the market and share monopoly profits. The result is that weak patents flourish.[19]

Until recently, there was little empirical evidence to support an opinion regarding the potential cost to consumers from these pay for delay arrangements. But thanks to the economists at the FTC and a new provision that mandates the filing of all Hatch-Waxman settlement agreements, there is now credible data which provides evidence in support of the conclusion that conservatively reverse payment settlement agreements cost the American consumers in excess of $35 billion for the years between 2009 and 2019 as calculated by the Federal Trade Commission (hereinafter “FTC”) and as illustrated in the chart below:[20]

The FTC’s calculation is based on the following four criteria: “(1) the consumer savings that result from generic competition in any given month, (2) the likelihood that a generic manufacturer and brand-name manufacturer will reach a settlement that delays entry in return for compensation, (3) the length of entry delay resulting from such settlement, and (4) the combined sales volume of drugs for which settlements are likely.”[21] The FTC viewed the consumer savings factor at 77%, which is reasonable considering market demand for generics is high and the price for generics is significantly lower than brand name drugs.  It estimated that the average agreement with pay for delay provisions postpones entry for nearly 17 months more than agreements without payments, which is again reasonable considering that many such agreements specify periods that far exceed 17 months. Then the FTC arrived at dollar sales of paragraph IV statistically sampled drugs which yielded a per year estimate of $3.2 billion dollars. The 77% savings multiplied by the $3.2 billion dollar sales, and further multiplied by 1.42 years (17 months) yields $3.5 billion in annual purchaser savings to consumers. The calculations establish the enormous financial repercussions of pay-for-delay agreements and confirm what is generally well known. Generics often sell at rates discounted by sixty percent or more from the price of the brand name pharmaceutical. For example, you can buy a month supply of the generic version of Zantac for $3 instead of $111 for the brand name product.[22]

A very recent study of twenty reverse payment settlements indicates that the costs of these pay for delay arrangements may be even higher.  A study by the United States Public Interest Research Group (“PIRG”) based on twenty agreements, concluded: (a) reverse payment payoff deals delay generic drug entry by five (5) years on average and at times as long as nine (9) years; (b) the cost of the brand-name drug is on average ten (10) times more expensive than the generic and at times thirty three (33) times more expensive; and, (c) combined these brand name drug companies have generated an estimated $98 billion in total sales for these drugs while the generic versions were delayed from competing. The following chart lists the top 20 generic drugs delayed by pay-for-delay deals that evidence these metrics[23]:

 

A.             Case Studies: Cipro and Lipitor

Generic competition is essential to ensuring accessible healthcare to Americans. In 2010, consumers paid $21.7 billion for pharmaceuticals, an increase of over 33% from the $15.8 billion paid in 2006.[24] Ensuring affordable pharmaceuticals is important not just for consumers but also for states. State and local governments’ budgets are depleted at a rate of $40 billion per year as a result of drug prescriptions.[25] California’s Medi-Cal reimbursements for pharmaceuticals exceed $2.3 billion per year.[26] It is for this reason that generics play an integral role in affordable healthcare. When pharmaceutical companies enter into pay-for-delay agreements, the nation suffers conservatively $35 billion over ten years, of which California will bear $4.2 billion, or approximately 12 percent of the total burden.[27]

A newly patented drug covered by a strong patent represents a valuable innovation and thus offers valuable and unique health-related benefits to society. But a drug whose patent is at serious risk of invalidation may not, thus a reverse payment settlement in connection with such a drug may well harm consumers and the economy. This was likely the situation with Cipro which was manufactured by Bayer.[28]

In Cipro, Bayer paid several generics some $400 million to end their challenges to Bayer’s patent on Cipro and to delay entry into the market until the expiration of that patent. To help cover the costs of these pay-for-delay payments, Bayer raised the price of Cipro.[29] In light of the relative inelasticity of demand for pharmaceuticals such as Cipro, it should come as no surprise that following the settlement, consumers paid $5.30 for a single Cipro pill that should have cost $1.10.[30]

Lipitor (atorvastatin)[31] offers another look at the market effects of pay-for-delay schemes. Lipitor was the “top-selling prescription medication in the United States in 2010, earning its manufacturer, Pfizer, more than $7 billion in total revenue.”[32] A Lipitor patent expired in June 2011, with the first to file generic, Ranbaxy, having agreed to avoid marketing a generic version until November.[33]  Just a few months delay in marketing a generic, can cost consumers as in the case of Lipitor, hundreds of millions if not billions of dollars. Of particular note, and in addition to the general inelastic nature of prescription pharmaceutical drug demand, as compared to consumer goods, the market for certain drugs, such as Lipitor, will continue to increase as the nation’s population continues to age–thus exacerbating the costs or benefits associated with the allowance or prohibition of pay-for-delay schemes. When generic simvastatin (a similar cholesterol reducing drug) was released to market, within 1 month after market entry, the generic cost “84% of the average brand-name price in the quarter before that entry, 81% after 6 months, and about 40% after 12 and 36 months.”[34]

[35]

 Based on such historical data, it was estimated a generic of Lipitor “will be $0.82 at the time of market entry and $0.49 after the 6-month exclusivity period that is granted to the first generic product.”[36] Therefore, the overall savings from the availability of a generic form of Lipitor is projected to reach $4.5 billion annually by 2014.[37] When a pay-for-delay scheme was implemented however between Pfizer and Ranbaxy, the first filer, and market entry was delayed from June to November, this “5-month delay cost Americans an estimated $324 million in savings.”[38]  This delay in the marketing by the first filer, also had the effect of delaying the multiple generic entries that have the effect of reducing the price of generic Lipitor to some 80% or more of the branded price, thereby saving consumers billions per year.

Combined, these two real-world case studies, one an antibiotic, and one a widely prescribed cholesterol reducing drug highly utilized by the nation’s aging population, illustrate the gravity of financial harm inflicted on individuals and society as a result of pay-for-delay schemes. Many of these schemes invoke the cover of intellectual property protection to share monopoly profits and wrongfully prolong a monopoly while defeating the purpose of the Hatch-Waxman Act. The outcome is both legally unjust and unconscionably immoral.

IV. The Hatch-Waxman Act and Paragraph IV Patent Challenges

 The Drug Price Competition and Patent Term Restoration Act was enacted in 1984 by Congress in an attempt to jumpstart generic competition with brand name pharmaceuticals.[39] This act is also commonly referred to as the Hatch-Waxman Act.[40] Congress has explained that the purpose of the Hatch-Waxman Act was “to make available more low cost generic drugs.”[41] The Hatch-Waxman Act seeks to achieve this goal by “reward[ing] the first generic manufacturer who submits an ANDA and a paragraph IV certification by providing it with a 180-day period during which the FDA will not approve subsequent ANDA applications.”[42]

In addition, when a generic manufacturer files an ANDA, it is also required to file a certification that, in the opinion of the applicant and to the best of his knowledge, the proposed generic drug does not infringe any patent listed with the FDA as covering the patented drug.[43] Generic manufacturers can satisfy the requirement by “certifying one of the following four options with respect to the patent for the listed drug: (I) that such patent information has not been filed, (II) that such patent has expired, (III) by certifying the date on which such patent will expire, or (IV) that such patent is invalid or will not be infringed by the manufacture, use, or sale of the new drug for which the application is submitted.”[44] At issue in many so-called “reverse payment” or “pay-for-delay” schemes is the utilization of the fourth approach listed above.

In operation, when a potential generic manufacturer files a paragraph IV certification, the patent holder is put on notice and “may initiate an infringement suit based upon said filing.”[45] The patent holder is given 45 days from the time of the paragraph IV filing to file its claim, upon which an automatic stay is initiated which “prevents the FDA from approving the generic drug until the earlier of (1) thirty months have run or (2) the court hearing the patent challenge finds that the patent is either invalid or not infringed.”[46]

The crux of the disagreement between the majority and the dissent in the AndroGel decision is whether or not patent law offers full (or almost full) antitrust immunity to the patent holder and allows said patent holder to market, monopolize, and/or exploit the patent in any way he sees fit so long as the conduct is related to a product, method, or ingredient allegedly covered by a patent regardless of the patent’s actual scope and validity, as the dissent argues; or whether patent holders claims should be subject to antitrust scrutiny and potential liability when settling patent related claims under “paragraph IV.”[47] The majority correctly recognizes that patent litigation settlement where “reverse payments” are used to settle a dispute should be reviewed using the “rule of reason” as opposed to an approach utilizing the so-called “scope of the patent” test to gauge for anticompetitive activity. Before analyzing the high court’s decision however, it is imperative to review the road that led here and the development of the “scope of the patent” test, including the split between the circuits and the benefits and challenges associated with the different legal standards they utilized.

 V. Evolution of Case Law – A Brief Survey of the Legal Landscape

Pre-AndroGel

The Supreme Court’s review of the issues discussed was inevitable in light of the myriad decisions on the topic and the circuit-split on the appropriate legal standard under which to review reverse payment agreements. A summary of the notable circuit decisions is as follows:

       A. Andrx Pharms, Inc. v. Biovail Corp (D. C. Circuit 2001)

Hoechst Marion Roussel, Inc. (HMRI) is the owner of the brand name drug Cardizem CD.[48] In 1995, appellee Andrx Pharmaceuticals, Inc. (“Andrx”) filed an abbreviated new drug application (“ANDA”) with the FDA seeking approval to manufacture and sell a generic form of Cardizem CD.[49]  Andrx filed a paragraph IV certification and was timely sued by HMRI for patent infringement. [50]  In June 1997, Biovail Corporation International (“Biovail”), another generic competitor, also filed a paragraph IV certification to produce a generic of the drug.[51] The FDA issued tentative approval of Andrx’s ANDA, and shortly after, HMRI and Andrx entered into an agreement (“Agreement”) pursuant to which HMRI would pay Andrx $40 million per year beginning on the date that Andrx received final approval from the FDA and ending on the date that Andrx either began selling generic Cardizem CD or was adjudged liable for patent infringement in the pending suit.[52] On July 3, 1998, Andrx was granted final FDA approval but it delayed marketing the drug until June 23, 1999. [53] The apparent purpose of this agreement was to delay the triggering of Andrx’s 180-day period exclusivity that in turn prevented the entry by any other potential generic manufacturer.[54]

The D.C. Circuit reversed the district court’s dismissal with prejudice of Biovail’s antitrust claims against Andrx, holding that the agreement between HMRI and Andrx could “reasonably be viewed as an attempt to allocate market share and preserve monopolistic conditions.”[55] The D.C. Circuit treated the payment from HMRI to Andrx as prima facie evidence of an illegal agreement not to compete, noting that the “Andrx argument that any additional actor would wait for resolution of the patent infringement suit [before triggering the 180-day exclusivity period] is belied by the quid of HMRI’s quo.[56] The court also observed that the Hatch Waxman Act attempts to get generic drugs to patients at “reasonable prices-fast.”[57] “The statutory scheme does not envision the first applicant’s agreeing with the patent holder of the pioneer drug to delay the start of the 180-day exclusivity period.” [58]

B. In re Cardizem CD Antitrust Litigation (6th Circuit 2003)

The Andrx decision above paved the way for several consumer class action cases.[59] The Sixth Circuit’s decision concerned the same agreement considered by the D.C. Circuit in Andrx. Plaintiffs, direct and indirect purchasers of Cardizem CD, alleged claims under §1 of the Sherman Act, 15 U.S.C. § 1 for the delay of market entry of the drug.  Defendants HMR and Andrx filed motions to dismiss arguing plaintiffs failed to allege and could not allege an “antitrust injury”.  The district court denied defendants’ motion.  Plaintiffs moved for partial summary judgment on the issue of whether the Agreement was per se illegal under § 1 of the Sherman Act, 15 U.S.C. § 1, and the district court agreed.[60] The district court certified for interlocutory appeal two issues: (1) whether the language of the Sixth Circuit’s decisions in Valley Products Co. v. Landmark, 128 F.3d 398, 404 (6th Cir. 1997) and Hodges v. WSM, Inc., 26 F.3d 36, 39 (6th Cir. 1994) required dismissal of Plaintiff’s antitrust claims at the pleading stage if Plaintiffs cannot allege facts showing that Defendants’ alleged anticompetitive conduct was a “necessary predicate” to their antitrust injury; and (2) whether the Agreement constituted a restraint on trade that is per se illegal.[61]

The Sixth Circuit Court held the district court properly denied Defendants’ motions to dismiss and granted the Plaintiffs’ motions for summary judgment that the Defendants’ Agreement was a per se violation of the antitrust laws.[62] To assist in answering the district court’s issue of the “necessary predicate” test, the court first addressed the issue of per se illegal restraints on trade.  Certain restraints are deemed unlawful per se because they “have such predictable and pernicious anticompetitive effect, and such limited potential for procompetitive benefit.”[63]Per se treatment is appropriate ‘once experience with a particular kind of restraint enables the Court to predict with confidence that the rule of reason will condemn it.’”[64] These restraints are not sufficiently common or important to justify the time and expense necessary to identify them.”[65] The court found the Defendants’ Agreement was a classic example of a per se illegal restraint on trade, reasoning the Agreement guaranteed to HMR that Andrx, its only potential competitor at that time would refrain from marketing its generic version in exchange for payment.  The Agreement “also delayed the entry of other generic competitors who could not enter until the expiration of Andrx’s 180-day period of marketing exclusivity, which Andrx had agreed not to relinquish or transfer.”[66] Because this was a “plain vanilla horizontal agreement to restrain trade” the necessary predicate test was met to establish antitrust injury.[67]

       C. Valley Drug Co. v. Geneva Pharm. (11th Circuit 2003)

In Valley Drug, defendant-appellant Abbott Laboratories (“Abbott”) obtained FDA approval of a new drug application for Hytrin, a brand-name drug with the active ingredient dihydrate terazosin hydrochloride, and held a number of patents related to terazosin hydrochloride compound over the years. [68]  Abbott entered into agreements (“Agreements”) with defendant Zenith Goldline Pharmaceuticals (“Zenith”) and defendant-appellant Geneva Pharmaceuticals (“Geneva”) to settle patent disputes.[69]   Zenith agreed not to sell or distribute any pharmaceutical product containing any form of terazosin hydrochloride until someone else introduced a generic terazosin hydrochloride product first or until Abbott’s patent expired.[70] Geneva agreed not to sell or distribute any pharmaceutical product containing any form of terazosin hydrochloride until Abbott’s patent expired, someone else introduced a generic terazosin hydrochloride drug, or Geneva obtained a court judgment that its terazosin tablets and capsules did not infringe the patent or that the patent was invalid.[71] Plaintiffs asserted that the Agreements violated the Sherman Act’s prohibition against contracts in restraint of trade.  The issue was whether the district court properly determined that the Agreements among the defendants were per se violations of § 1 of the Sherman Act, 15 U.S.C. § 1.[72]

The Eleventh Circuit rejected the district court’s characterization of the instant Agreements as illegal per se, holding that the district court incorrectly applied the law.  Because the market allocation characterization was central to the district court’s conclusion that the Agreements in their entireties were per se violations of § 1 of the Sherman Act, the court reversed the grant of summary judgment and remanded the case for further proceedings with a different standard of analysis.[73] The court reasoned a patentee’s allocation of territories is not always the kind of territorial market allocation that triggers antitrust liability because the patent gives its owner a lawful exclusionary right.[74] It said the district court failed to consider the exclusionary power of Abbott’s patent in its antitrust analysis.[75] The court recognized that some kinds of agreements are per se illegal, whether engaged in by patentees or anyone else, such as tying or price-fixing agreements, but the exclusion of infringing competition is the essence of the patent grant.[76] The court also emphasized that the brand name manufacturer might have prevailed in the underlying patent litigation and highlighted policy considerations favoring the settlement of patent litigation.

D. Schering-Plough Corp. v. FTC (11th Circuit 2005)

 In Schering-Plough v. FTC, petitioner Schering-Plough Corp. (“Schering”) manufactured and marketed the extended-release product, K-Dur 20.[77]  The active ingredient potassium chloride was commonly used and unpatentable.  Petitioner Upsher-Smith Laboratories, Inc. (“Upsher”) sought FDA approval to market a generic version, which prompted Schering to sue for patent infringement.[78] During settlement discussions, Schering refused to pay Upsher to “stay off the market.”  Instead, Schering proposed a compromise on the entry date, and agreed to license Upsher’s product, Niacor-SR (“Niacor”).[79] Later, after observing Niaspan’s poor performing sales, a substantially similar product to Niacor, Upsher and Schering decided further investment in Niacor would be unwise.[80] ESI Lederle, Inc. (“ESI”) also sought FDA approval to market its own generic version of K-Dur 20.  Schering sued ESI, and after lengthy unresolved litigation, Schering and ESI agreed to divide Schering’s remaining patent life and allow ESI’s generic version to enter the market almost three years ahead of the patent expiration date.[81] ESI also demanded payment to settle the case, and with assistance from the magistrate judge, the parties agreed to $10 million if ESI received FDA approval by a certain date.[82]

The FTC filed an administrative complaint against Schering, Upsher and ESI alleging Schering’s settlements were illegal restrains on trade in violation of § 1 of the Sherman Antitrust Act, 15 U.S.C. § 1, and § 5 of the Federal Trade Commission Act, 15 U.S.C. § 45(a).[83] Based on substantial evidence and expert witnesses, the Administrative Law Judge (“ALJ”) concluded the FTC complaint had no basis in law or fact.[84] On appeal, the Federal Trade Commission reversed the ALJ, concluding the quid pro quo for the payment was an agreement to defer the entry dates and would injure competition and consumers.  On appeal to the Eleventh Circuit, the issue was whether substantial evidence (the standard under 15 U.S.C. § 45(c)) supported the conclusion that the Schering settlements unreasonably restrained trade.[85]

The Eleventh Circuit set aside the Commission’s decision and vacated the cease and desist order, heavily citing law from Valley Drug Co.[86] In reaching its decision, the court looked to Universal Camera Corp.[87] Further, the appellate court disagreed with the ALJ and Commission’s use of the rule of reason standard to decide this case, and stated the proper analysis of antirust liability required an examination of: (1) the scope of the exclusionary potential of the patent; (2) the extent to which the agreements exceed that scope; and (3) the resulting anticompetitive effects.[88]

The court reasoned that FTC counsel did not prove that Upsher and ESI could have entered the market on their own prior to Schering’s patent’s expiration, and that there had been no allegation that the patent itself was invalid or the patent infringement lawsuits were “shams.”[89] The court stated that patent law bestowed “the right to exclude others from profiting by the patented invention”[90] and provided the patent owner “with what amounts to a permissible monopoly over the patented work.”[91] Further, the court applied the substantial evidence test and concluded Schering’s settlements did not exceed the patent’s scope.  The court reasoned that the ALJ’s credibility determinations and overwhelming evidence contradicted the Commission’s conclusion that relied on information not in the record.[92] In the ESI settlement, the FTC did not rebut Schering’s testimony that it would have won the patent case, and that ESI’s entry date reasonably reflected the strength of Schering’s case.[93]

Regarding anticompetitive effects, the appellate court discussed public policy at length.  “Given the costs of lawsuits to the parties, the public problems associated with overcrowded court dockets, and the correlative public and private benefits of settlements, we fear and reject a rule of law that would automatically invalidate any agreement where a patent-holding pharmaceutical manufacturer settles an infringement case by negotiating the generic’s entry date, and, in an ancillary transaction, pays for other products licensed by the generic. Such a result does not represent the confluence of patent and antitrust law.”[94] The court concluded the settlement language did not exceed the arguable scope of the Schering patent to have the effect of extinguishing competition, and there was no evidence in the record to support the Commission’s conclusion that the parties could have attained earlier market entry without the role of payments. The court emphasized the efficiency-enhancing objectives of a patent settlement, stating “[p]ublic policy strongly favors settlement of disputes without litigation.”[95] Schering testified that litigation settlements are not always possible, and ancillary agreements may be the only avenue to settlement.[96] “If settlement negotiations fail and the patentee prevails in its suit, competition would be prevented to the same or an even greater extent because the generic could not enter the market prior to the expiration of the patent.”[97]

       E. In re Tamoxifen Citrate Antitrust Litigation (2nd Circuit, 2005)

 The Tamoxifen decision also addressed arguments that patent litigation may actually decrease product innovation by amplifying the period of uncertainty around the drug manufacturer’s ability to research, develop, and market the patented product or allegedly infringing product.[98] In In Re: Tamoxifen Citrate Antitrust Litigation, Defendant Imperial Chemical Industries, PLC (“ICI”) obtained a patent for Tamoxifen sold by Zeneca (hereinafter, “Zeneca”).[99]  Defendant Barr Laboratories, Inc. (“Barr”) filed an ANDA with the FDA to market a generic version.  Zeneca in turn, filed a patent infringement lawsuit against Barr.[100] The district court declared Zeneca’s patent invalid because Zeneca willfully withheld information about the drug from the Patent and Trademark Office, for which Zeneca appealed and concurrently entered into a settlement agreement (“Settlement Agreement”) with Barr.[101] Zeneca agreed to a pay Barr $21 million for a non-exclusive license to sell Zeneca-manufactured Tamoxifen under Barr’s label.  Barr agreed to not market its generic version until Zeneca’s patent expired.  They also agreed if the Tamoxifen patent were to be declared invalid in a final and unappealable judgment, Barr would be allowed to pursue a 180-day exclusionary period.[102]  Plaintiffs brought a class action suit against Zeneca and Barr alleging violation of the Sherman Act because the Settlement Agreement resuscitated a patent found to be invalid, monopolized the market, shared unlawful monopoly profits, maintained an artificially high price for Tamoxifen, and suppressed competition from generic drug producers.[103]

The Second Circuit applied a presumption of patent validity and held that “there is no injury to the market cognizable under existing antitrust law, as long as competition is restrained only within the scope of the patent.”[104] The only exceptions to this rule, the court held, occur where there is evidence that the patent was procured by fraud or that the enforcement suit was objectively baseless.[105] This test has come to be known as the “scope of the patent test,” though it sanctions a disregard of the actual scope and validity of the patent absent evidence of fraud or sham litigation. On appeal the issue was whether the Settlement Agreement restrained trade in violation of the antitrust laws, and if plaintiffs suffered antitrust injury from the Settlement Agreement or Barr’s 180-day exclusivity period. The Second Circuit conceded that there was a potentially troubling result of such a rule in that “[t]he less sound the patent or the less clear the infringement, and therefore the less justified the monopoly enjoyed by the patent holder, the more a rule permitting settlement is likely to benefit the patent holder by allowing it to retain the patent.”[106] The court countered however that so long as the law encourages settlement, weak patents will be settled even though they will perpetuate monopolies that are undeserved.[107]

Judge Pooler in the dissent stressed the importance of balancing the interests at stake in this litigation (patent law versus antitrust law), and thus disagreed with: (1) the majority’s “sham” or “baseless” test for judging whether a settlement agreement violated antitrust law; and (2) dismissal of plaintiffs’ complaint at the Rule 12(b)(6) stage, which did not allow the plaintiffs to conduct discovery to build the factual record.[108] The dissent articulated its own general reasonableness standard for evaluating an anti-competitive agreement.[109] “Thus, in assessing the reasonability of a Hatch-Waxman settlement, [the dissenting judge] would rely primarily on the strength of the patent as it appeared at the time at which the parties settled and secondarily on (a) the amount the patent holder paid to keep the generic manufacturer from marketing its product, (b) the amount the generic manufacturer stood to earn during its period of exclusivity, and (c) any ancillary anti-competitive effects of the agreement including the presence or absence of a provision allowing the parties to manipulate the generic’s exclusivity period.”[110] Regarding improper dismissal, the dissent explained that the reasonableness inquiry required a factual record not yet in existence.[111] “At minimum, the plaintiffs should be allowed to develop a factual record to demonstrate that Zeneca’s litigation was sham because they had no reason to anticipate the standard articulated here; [noting] that the courts that have finally rejected antitrust challenges to Hatch-Waxman settlements had done so after reviewing a full record.[112]

F. In re Ciprofloxacin Hydrochloride Antitrust Litigation (Fed. Circuit 2008) and (2nd Circuit 2010)

Brand named company Bayer owned the patent to the active chemical ingredient contained in the antibiotic drug Cipro.[113] The patent was issued in 1987.[114] In 1991, Barr, a generic competitor of Bayer filed an ANDA for a generic version of the drug.[115] The ANDA included a paragraph IV certification. Thus, under the Act Barr was entitled to the benefit of the 180-day exclusivity period. In 1992, patent litigation ensued between Bayer and Barr.[116]  A litigation funding agreement was then entered into between Barr and other generic companies, HMR and Rugby, to share profits and continue the prosecution of the patent litigation.[117]

Bayer filed a motion for partial summary judgment in the patent infringement suit concerning Barr’s invalidity defense. On June 5, 1996, the district court denied Bayer’s motion. Just before trial, Bayer entered into settlement agreements with each of the generic defendants.[118] Under the settlement agreements, each generic defendant agreed to abandon all challenges to the validity or enforceability of Bayer’s Cipro patent.[119] In exchange, Bayer agreed to make total payments of $398.1 million to Barr, including an initial payment of $49.1 million and quarterly payments until the Cipro patent expired in December 2003.[120]

Direct and indirect purchasers filed antitrust cases in federal court challenging the settlement agreements. Cross motions for summary judgment were filed and the district court denied plaintiffs’ motion and granted defendants motion. On appeal, because of the Walker Process[121] claims included in the case, the indirect purchaser claims were transferred to the Federal Circuit Court of Appeal while the direct purchasers’ case remained in the Second Circuit Court of appeal.

The Federal Circuit upheld the rights of the patent holder as immune to any challenges under the antitrust laws. It endorsed the district court’s rationale which said that “this is because a patent by its very nature is anticompetitive; it is a grant to the inventor of the right to exclude others…a patent is an exception to the general rule against monopolies and to the right of access to a free and open market.”[122] As long as it is within the exclusionary scope of the patent, then it “is well within Bayer’s rights as the patentee” to pay for delay.[123] The court further deferred to the long-standing policy favoring settlement of disputes including those settlements that come out of patent litigation. It found that those settlements do not violate antitrust laws even if they had adverse effects on competition as long as they are within the exclusionary scope of the patent.[124]

The Second Circuit however was less deferential to the power of unexamined patent claims than was the Federal Circuit. While the Second Circuit Court affirmed the District court decision, it did so due to the precedential value of its Tamoxifen decision.[125] However, in doing so, the court gave four good reasons why the case might be appropriate for reexamination by an en banc Second Circuit.[126] Those reasons are: (1) the United States had urged repudiation of the agreements, especially for those settlements that greatly exceed anticipated litigation costs that were avoided by the settlement; (2) there was a significant increase in pay for delay settlements post Tamoxifen; (3) after the Tamoxifen decision, Senator Hatch was quoted as saying that “As coauthor of the [Hatch-Waxman Act], I can tell you that I find these type[s] of reverse payment collusive arrangements appalling”; and, (4) the Tamoxifen decision may have been based on  erroneous understanding of the operation of the Hatch Waxman law and recognized that subsequent filers may not have the same incentive as the first ANDA filer in challenging patents which tips the scale once again in favor of antitrust principles over patent law.[127]

       G.   In re K-Dur Antitrust Litigation (3rd Circuit 2012)

In K-Dur, wholesalers and retailers sued the brand pharmaceutical company and its competitors for alleged Sherman Act violations for settling patent infringement litigation with an agreement that delayed competition. “K-Dur, Schering’s brand-name sustained-release potassium chloride supplement,”[128] was commonly used to treat potassium deficiencies caused by a variety of health conditions and/or resulting from usage of diuretic products to treat high blood pressure.[129] However, “Schering did not hold a patent for the potassium chloride salt itself,” since the “compound is commonly known and not patentable.”[130] Rather, Schering held a formulation patent on the time-release coating that was applied to the underlying potassium chloride crystals. The patent related to the method of creating the coating on the potassium chloride crystals. In this case, the brand name pharmaceutical company, in exchange for its competitors’ agreement to delay generic sales of the drug, paid them $60 million.

The Third Circuit in K-Dur rejected the “scope of the patent” test used by the other circuits, which foreclosed any real examination of the scope and validity of the patent except in those limited situations where fraud on the patent office or sham litigation was established.  Instead the Third Circuit favored the application of a “quick look” rule of reason analysis and decided that this test is appropriate since it is “based on the economic realities of the reverse payment settlement rather than the labels applied by the settling parties.”[131] In order to apply this test, “the finder of fact must treat any payment from a patent holder to a generic patent challenger who agrees to delay entry into the market as prima facie evidence of an unreasonable restraint of trade, which could be rebutted by showing that the payment (1) was for a purpose other than delayed entry or (2) offers some pro-competitive benefit.”[132] When this form of analysis is utilized, upon such showing, “plaintiff is not required to make a full showing of anti-competitive effects within the market” but rather the defendant “has the burden of demonstrating pro-competitive justifications.”[133]

The K-Dur court properly recognized that application of the “scope of patent” test by the other circuits had given undue weight and legal effect to the mere claims of patent holders, though those claims had not been adjudicated.[134] While a patent is a legal monopoly on an invention and seeks to balance the benefit of research and development and the benefit of the invention to society with the higher cost incurred by a lack of competition, utilizing this scope of patent test would elevate a “presumption [of validity that] is intended merely as a procedural device and is not a substantive right of the patent holder.[135] Patents are not granted through an adversarial process and by nature are intended to protect inventors, not limit or otherwise inhibit or encumber inventors. As such, the court said that it was critical that the legal system not offer blanket immunity to anticompetitive behavior falling within the alleged scope of patent because society benefits from only those patents that are valid, strong and the result of genuine innovation; in contrast weak and invalid patents only generate revenue for the patentee to the detriment of consumers who receive nothing in return.  The importance of refusing to allow a patent holder blanket immunity to act anti-competitively at its whim is highlighted by the reverse payment system, which shares monopoly profits between would-be competitors without any assurance that the underlying patent is either valid or infringed.[136]

VI. The Appropriate Level of Scrutiny

Three somewhat overlapping modes of analysis are utilized by courts to determine the competitive reasonableness of challenges under Section 1 claims–“per se,” “quick look,” and “rule of reason.”[137] It was the “rule of reason” that the Supreme Court chose as appropriate for scrutinizing reverse payment settlements. Under the rule of reason, the AndroGel court considered factors such as: (1) the size of the payment, (2) its scale in relation to the payor’s anticipated future litigation costs, (3) the fair value of other services provided by the payee, and (4) the existence or lack of any other convincing justification for the payment.[138]

The per se approach applies when the practice is plainly anticompetitive and without redeeming competitive virtue such that the courts will conclusively presume that they are unreasonable.[139] The plaintiff need only show that the practice occurred; he need not show its competitive unreasonableness or actual anticompetitive market effect. This often means that he need not undertake an elaborate study of the industry designed to prove the relevant market in which to assess its effect.[140] Moreover, the defendant is precluded from attempting to justify the restraint as being reasonable.[141] Prime examples of practices considered illegal per se are horizontal agreements to allocate markets or customers or efforts to restrict output between competitors.[142]

The “full-blown” rule of reason typically requires “case-by-case inquiry [and] is necessary to determine whether the agreement is one that merely regulates or perhaps promotes competition or one that unreasonably suppresses competition.”[143] In application, the analysis requires a review of all circumstances “bearing on the agreement’s likely competitive effect, a balancing or weighing of the restraint’s pro-competitive and anticompetitive effects.”[144] “If the latter outweigh the former, the restraint is unlawful. The burden is [then] on the plaintiff to prove that, on balance, the restraint has a significant or substantial adverse effect on competition.”[145] In this scheme, adverse effects “on interests other than competition are irrelevant” with the restraint’s reasonableness a question of fact.”[146]

In summary according to one authority:

“the issue in every § 1 rule-of-reason case is whether the challenged agreement will (or did) result in the defendants’ obtaining, maintaining, or expanding their market power; and if so, whether the anticompetitive effects of the market power resulting from the agreement significantly outweigh any procompetitive effects of the agreement, such as increased efficiency, higher quality, greater innovation, wider choice, or better access. [In applying the] full-blown rule-of-reason analysis: (1) the plaintiff bears the initial burden to prove that the agreement had anticompetitive effects; (2) if it does, the burden of going forward shifts to the defendants to establish procompetitive justifications for the agreement; and (3) if the defendants sustain their burden, the burden shifts back to the plaintiff to show that the anticompetitive effects of the agreement outweigh its procompetitive effects or that the procompetitive effects could have been achieved in a less anticompetitive manner.”[147]

In general, in the majority of rule of reason cases, the plaintiff is required to introduce evidence of market power and effects, whether by direct evidence or by defining relevant markets and computing market shares.[148] These calculations can establish the requisite foundation from which the plaintiff must then demonstrate the defendant’s significant market power coupled with its “ability to sustain a price increase significantly above the competitive level” so that  “it can show that the agreement resulted (or will result) in anticompetitive effects.”[149] Finally, the “purpose and intent for the agreement, its effect on competition, and any justifications for its use” are generally evaluated.[150]

In FTC v. Actavis the Supreme Court, after noting substantial evidence that reverse payment agreements are often anticompetitive,[151] invited the lower courts to develop a structure for the required “rule of reason” analysis of “reverse payment” settlements. The “structured rule of reason” has its genesis in cases such as In the Matter of Massachusetts Board of Optometry and Polygram Holding v. FTC.[152] When applying the structured rule of reason, the plaintiff bears the burden of establishing the prima facie case[153] that competition has been restrained.[154] If the plaintiff is successful in meeting the burden, then the burden shifts to the defendant to justify its actions as pro-competitive.[155] Should the defendant successfully justify its actions, then the burden shifts “back to the plaintiff to attack the justifications as pretextual or a sham.”[156] If “the plaintiff is successful, the case is over;” but should the plaintiff prove to be unsuccessful, then “the plaintiff has the ultimate burden of persuasion to prove the anti-competitive effects outweigh the pro-competitive benefits.”[157]

Exactly how the lower courts will apply the rule of reason after AndroGel is still the subject of debate. The majority, while rejecting the quick look variant urged by the Federal Trade Commission, suggested the trial court could structure the trial.[158]  It also described a number of factors that might obviate the need to litigate the scope and validity of the patent. The majority further indicated that not every supporting fact may have to be determined and, rather, “there is always something of a sliding scale in appraising reasonableness, and as such the quality of proof required should vary with the circumstances.”[159]

While the rule of reason has been established as the determinative standard for analysis in federal cases, states are free to use less accommodating approaches, such as the “quick look” when evaluating claims under state antitrust law. The “quick look” is an abbreviated version of the rule of reason, in which proof of actual market injury such as sustained supracompetitive prices or reduced output–or conduct of a type clearly likely to cause such market injury–obviates the need for the more rigorous market and effects analysis that would normally be required to establish a plaintiff’s prima facie case under the rule of reason.”[160] “Quick look” or “truncated rule of reason” antitrust analysis applies where the “conduct at issue [does not] fall within a recognized per se category […] but […] at the same time [has] likely anticompetitive effects that are so intuitively obvious as to be clear without a detailed market analysis.”[161] Notably, the “quick look approach relieves the plaintiff of first having to rigorously prove the relevant market and the defendant’s possession of market power within the market before shifting the burden onto the defendant to present a plausible procompetitive justification for the challenged conduct, such as facilitating a joint venture, inducing the sharing of technology, or achieving other procompetitive efficiencies.”[162] Should a plausible justification be offered, “then the burden shifts back to the plaintiff to prove the overall competitive unreasonableness of the challenged restraint under the normal rule of reason balancing analysis.”[163] As such, “quick look analysis carries the day when the great likelihood of anticompetitive effects can easily be ascertained.”[164]

The “quick look” may appeal to state courts in states, such as California, where the legislature has adopted laws and the courts have embraced jurisprudence favorable to antitrust plaintiffs.  Consider, for example, anti-Illinois-Brick statutes or Illinois-Brick repealers that many states have. These statutes expressly permit indirect purchasers to challenge alleged price-fixing schemes.  They were adopted in the wake of the Supreme Court’s ruling to the contrary in Illinois-Brick.  Arguably, the adoption of such statutes suggests a welcoming posture toward antitrust claims, a posture that would be furthered by embracing “quick look” scrutiny of “reverse payment” settlements.

VII. The Supreme Court of the United States’ Decision in AndroGel

The AndroGel case involved the patent of Solvay Pharmaceuticals on its topically applied testosterone drug, AndroGel. Subsequently, generic drug manufacturers Actavis and others filed “paragraph IV” applications to launch a generic with the FDA and certified the AndroGel patent was invalid or not infringed. Solvay sued Actavis and other generics for infringement, and eventually settled. Upon FDA approval of the generic, Solvay Pharmaceuticals offered Actavis (then Watson)  money (“reverse payments”) in exchange for the following promises: (1) Actavis would not manufacture a generic competitor to Solvay’s AndroGel; (2) Actavis would promote AndroGel; and (3) Solvay would in turn pay Actavis to stay off the market with a generic of AndroGel.[165]  Specifically, “Solvay agreed to pay million of dollars to each generic-$12 million in total to Paddock; $60 million in total to Par; and an estimated $19-$30 million annually, for nine years, to Actavis.”[166] While the companies “described these payments as compensation for other services the generics promised to perform,”[167] the FTC alleged that the companies had unlawfully agreed to share monopoly profits and hid behind the patent to protect their unlawful agreement.

A. Interfering with the right to challenge a patent

While both the majority and the dissent in AndroGel recognize the benefits associated with patents and settlements, the dissent fails to acknowledge that the agreements will have seriously anticompetitive effects especially if they are based upon patents that are neither valid nor infringed. No one disputes that a valid patent confers a monopoly–a right of exclusion–which typically would be against the best interest of the public as it allows for the charge of supra-competitive prices. But immunizing parties who enter into settlement agreements principally for the purpose of maintaining a monopoly without ensuring that the patent is otherwise valid or infringed would not serve the public and would indeed stifle innovation. Where the patent is invalid or perhaps weak because of over-breadth or other defect, there is no reason to tolerate supra competitive prices.[168] It is for this very reason that analyzing the motivations behind a reverse settlement agreement is consistent with both patent law and antitrust law.

B. The Majority Opinion: A Trajectory for Analysis of Reverse Payment Settlements Albeit with No Explicit Roadmap.

Highlighting the importance of ensuring that only valid and infringed patents are used to protect monopoly prices is the particular context presented here. Specifically, the reverse payment scheme appears to be generally isolated to the pharmaceutical market. In balancing the needs of society with policy that favors innovation and subsequently patents, it is also essential to ensure access to affordable healthcare, given the staggering cost healthcare presents to families (causing 62% of personal bankruptcies); insurance premiums, and the government (and accordingly taxpayers) under the Affordable Care Act.[169] Accordingly, should the minority’s position be followed, opportunity for collusion and profiteering through shared monopoly profits would become ripe. The first potential generic manufacturer, who would usually be a patentee’s prime initial competitor and the one most motivated to challenge the validity and scope of the patent, is instead accepting payouts from the patentee not to compete and is in fact potentially aiding the would-be competitor by assisting in marketing, manufacturing, and/or other duties in exchange for a payout significantly disproportionate to the services provided.[170]

The majority does not take lightly “…the value of settlements and the patent litigation problem[, but] … conclude[s] that this patent-related factor should not determine the result here.”[171] While settlement generally carries significant benefit for litigating parties, including certainty in outcome and avoidance of costly and protracted litigation, in the scenario of reverse payments, an interested third party is almost certainly injured, and has no voice, in the settlement outcome–the consumer. In contrast, the minority heralds a general public policy of favoring settlements as the end-all be-all driving force for allowing reverse payment settlement agreements. The problem however is that, should this public policy be accepted, the only parties benefiting from pay-for-delay paragraph IV settlements are the branded pharmaceutical and the prospective generic competitor. As such, the “public policy” of settlement does not benefit the public, but quite to the contrary, to the detriment of the public, lines the coffers of pharmaceutical companies. The minority’s argument championing the unlegislated “public policy” favoring settlement, as considered in a vacuum void of all other public policies, including the nation’s strong antitrust laws, fails to properly recognize the costs, both economic and social, to allowing economic manipulation by executing an end-run around the pro-public legislation that is paragraph IV.

With the above factors in consideration, chiefly that settlement at all costs is not prudent for the public, the majority considered five factors in reaching its conclusion:

“First, the specific restraint at issue has the “potential for genuine adverse effects on competition. The  payment in effect amounts to a purchase by the patentee of the exclusive right to sell its product, a right it already claims but would lose if the patent litigation were to continue and the patent were held invalid or not infringed by the generic product. […] The patentee and the challenger gain; the consumer loses. […] The rationale behind a payment of this size cannot in every case be supported by traditional settlement considerations.”[172]

This first factor raises the interesting reality that a patent holder with a “weaker” patent may be most tempted to settle a case with a prospective generic manufacturer for fear of losing its case on the merits, having its patent invalidated, and subsequently losing millions of dollars. However, while there is an artificial barrier to competition vis-à-vis the patent, there is also an artificial dam that prevents the floodgates of litigation should the patent holder settle with the prospective generic via a reverse payment settlement agreement. Specifically, as the Supreme Court notably points out, logically, should a patent holder settle with a prospective generic manufacturer, it may indicate that the patent holder does not have full faith in its patent or possibly in its ability to successfully defend its patent. However, under the Hatch-Waxman Act, while litigation and invalidation of patents is encouraged under paragraph IV and amply rewarded when done by the first filer, the Act offers significantly less reward for subsequent competitors from challenging the patent or entering the market for 180 days after the patentee and initial prospective generic manufacturer settle. As a result, the court correctly recognizes the importance of evaluating the potential harm on competition that may result from a settlement that violates procompetitive and/or antitrust principles.

“Second, these anticompetitive consequences will at least sometimes prove unjustified. The reverse payment, for example, may amount to no more than a rough approximation of the litigation expenses saved through the settlement. That payment may reflect compensation for other services that the generic has promised to perform-such as distributing the patented item or helping to develop a market for that item.”[173]

While the court should review reverse payment settlement agreements, the Supreme Court acknowledges that not all reverse payment settlement agreements will require the same level of scrutiny. For example, whether a patent-holding pharmaceutical pays a prospective generic manufacturer $10 million in efforts to avoid protracted litigation, or even $40 million to avoid litigation and to acquire the assistance of marketing and distribution stands in stark contrast to an indiscriminate payment of $400 million so disproportionate and with no perceivable benefit to the patent-holding pharmaceutical other than ensuring exclusion of competition.  Therefore, in some select instances, while the reverse payment settlement agreement may be anticompetitive on its face, the underlying justifications and the true thrust of the agreement may not violate antitrust laws.

“Third, where a reverse payment threatens to work unjustified anticompetitive harm, the patentee likely possesses the power to bring that harm about in practice. At least, the ‘size of the payment from a branded drug manufacturer to a prospective generic is itself a strong indicator of power’–namely, the power to charge prices higher than the competitive level.”[174]

This factor correctly appreciates that not all settlements are equal in market impact. Perhaps most important is evaluating the size of the payment not as it relates to the patent holder but to the prospective generic. In other words, payment of, for example, $100 million may not constitute a significant payout for a patent holding pharmaceutical who anticipates making several hundred millions to billions of dollars from the drug. Rather, the payout must be evaluated from the lens of the prospective generic manufacturer. The Hatch-Waxman Act seeks to increase competition by increasing generic competition by ridding the market of underserving patents and by providing the 180-day exclusivity period for the first successful prospective generic that challenges such a patent. Therefore, should a payout from the patent-holding pharmaceutical constitute a substantial enough payment that it can sufficiently “buy” the generic manufacturer and delay its entry into the market, then the anticompetitive harm should be characterized as unjustified under the lens of antitrust law when said payment enables the brand name pharmaceutical to subsequently charge supra-competitive prices.

“Fourth, an antitrust action is likely to prove more feasible administratively than the Eleventh Circuit believed. […] An unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival.”[175]

While not all reverse payments may be anticompetitive, the Supreme Court correctly notes that where the payout appears disproportionate or excessively large, or otherwise is left unexplained as to the consideration offered by the generic pharmaceutical, the payout likely violates antitrust law. The common canon “there is no such thing as a free lunch” largely characterizes this factor. Pharmaceutical companies are not charities, and where they are paying out millions of dollars for no apparent reason, other than to protect the validity of their patent and ensure their monopoly profits, there may correctly be the presumption that the patentee lacks substantial faith in its patent and seeks to ensure its monopoly via an unlawful pay-for-delay scheme.

“Fifth, the fact that a large, unjustified reverse payment risks antitrust liability does not prevent litigating parties from settling their lawsuit. They may, as in other industries, settle in other ways, for example, by allowing the generic manufacturer to enter the patentee’s market prior to the patent’s expiration, without the patentee paying the challenger to stay out prior to that point.”[176]

Finally, the Court highlights that reverse payments are not the only method of settling litigation and antitrust scrutiny does not foreclose settlements with adjusted entry dates and means other than payments to the generic. Specifically, in most other contexts, the reverse payment would not even be feasible and are basically unknown. Take for example where two parties litigate and Party A pays Party B to refrain from entering the market–nothing would preclude a third party, Party C from then entering the market. This is to say, preclusion of Party B from entering the market, vis-à-vis its settlement with Party A would not inhibit other third parties from competing by entering the market and challenging Party A’s control of the market. In the present context however, under the Hatch-Waxman Act, upon settlement between Party A and Party B, there will unlikely be a Party C or any other third parties because of the act’s 30-month exclusion period and 180 day exclusivity for the first challenger. As such, a unique closed universe is created for the particular drug on the market that in turn allows the unlawful sharing of monopoly profits. The Court thus states that Party A and Party B may settle their present pharmaceutical patent litigation as they would in any other litigation, and as was done before the courts began providing a presumptive lawfulness to these agreements.  Before these decisions as in Tamoxifen and Cipro, as the K-Dur court noted, parties to pharmaceutical patent litigation settled their litigation without payments, which were understood to be unlawful.[177]    The incentive provided to the first challenging party under the Hatch-Waxman Act to enter the market and to increase competition must not be manipulated and exploited as a tool to preclude competition while sharing monopoly profits.

The majority recognizes that a patent acts as a shield protecting the patentee from infringers and as a sword to ensure that the patentee’s efforts and resources are not stolen by others. A patent does not however afford the holder with carte blanche to violate other laws, such as antitrust laws, simply because there is a patent which may or may not be valid or infringed. The majority ruled that “this Court has indicated that patent and antitrust policies are both relevant in determining the ‘scope of the patent monopoly’ as well as the scope of any antitrust immunity afforded by the patent grant.[178] The majority further recognized that “although the parties may have reasons to prefer settlements that include reverse payments, the relevant antitrust question is: What are those reasons?”[179] For, if the reason is to “maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.”[180]

The majority summarized its reasoning:

 “a reverse payment, where large and unjustified, can bring with it the risk of significant anticompetitive effects; one who makes such a payment may be unable to explain and to justify it; such a firm or individual may well possess market power derived from the patent; a court, by examining the size of the payment, may well be able to assess its likely anticompetitive effects along with its potential justifications without litigating the validity of the patent; and parties may well find ways to settle patent disputes without the use of reverse payments. In our view, these considerations, taken together, outweigh the single strong consideration-the desirability of settlements-that led the Eleventh Circuit to provide near-automatic antitrust immunity to reverse payment settlements.”[181]

With this summary, the majority established the “rule of reason” as the applicable standard and decided against adopting the “quick look” type approach championed by the FTC.[182]  In rejecting the FTC’s preferred approach, the majority found that the “likelihood of a reverse payment bringing about anticompetitive effects depends upon its size, its scale in relation to the payor’s anticipated future litigation costs, its independence from other services for which it might represent payment, and the lack of any other convincing justification. The existence and degree of any anticompetitive consequences may also vary as among industries.”[183] Under the rule of reason standard, reverse payment settlements are given less deference than they would get under the quick look approach, but consumers are still left with protection from disguised or pretextual agreements that restrain competition. On balance, in light of the fact that paragraph IV seeks to reduce medication costs by increasing competition thwarted by dubious patents , one must wonder whether a different standard, such as the quick look standard would better achieve the purpose and goals of paragraph IV. Specifically, paragraph IV litigation can easily run into the millions of dollars. Such expensive litigation may serve as a substantial hurdle in seeking to enforce antitrust law.

The majority sought to balance the underlying policies behind patent law and antitrust considerations in its opinion. The result helps to ensure that “reverse payment” settlements are used only in connection with valid and infringed patents and bona fide negotiations. While a “quick look” approach might better effectuate the Hatch-Waxman Act, the Supreme Court’s decision will still serve to deter to anticompetitive behavior and provide recourse for consumers who could otherwise be injured financially by price-fixing conspiracies disguised as bona fide settlement agreements.

C. The Dissent: A Disillusioned Disaster

In the dissent’s opinion, patents are presumed valid and infringed and settlements all bona fide based merely on the strength of the patentee’s unexamined claims. The dissent assumes that the patentee, armed with a patent, is somehow invested with the right to pay off its competitors, though nothing in the patent statutes or laws is cited for this premise. Furthermore the dissent’s willingness to accord the patentee broad antitrust immunity the unquestioned right to pay off competitors is unfazed by the fact that many of these patents when actually examined by the courts are both invalid and not infringed. Likewise the dissent seems indifferent to the unequivocal purpose of the Hatch-Waxman Act to encourage generics to challenge dubious patents, and the value that such challenges offer consumers. All this is justified by the dissent’s reliance on an unlegislated public policy of favoring settlement. This is coupled with its almost dire warnings about the complexity of patent and antitrust litigation; the suggestion that courts dodge difficult issues by allowing collusive agreements is rather unsettling and does not suggest a result that comports with the true interests of consumers and affordable healthcare.

Acknowledging that the Hatch-Waxman Act was enacted exactly for the purpose of protecting consumers and enabling competition by having generics challenge improvidently issued patents, the dissent explains that “no legislation pursues its purposes at all costs.”[184]  But a policy of settlement at all costs is equally devoid of merit. Allowing a patentee with a weak patent to buy-off a competitor by sharing monopoly profits serves no discernible patent policy   while undermining the very purpose underlying the Hatch-Waxman Act to increase competition. Simply accepting the validity of a patent and allowing its indiscriminate use-without regard to its actual scope and validity- to harm competition does not aid innovation, advance the progress of arts and sciences and serves neither patent or antitrust laws.  To paraphrase the dissent, no canon should be pursued at all costs.

The dissent attempts to bolster its position by offering irrelevant precedent, such as that it has “long recognized that a patent holder is entitled to license a competitor to sell its product on the condition that the competitor charge a certain, fixed price.”[185] This precedent is inapposite for  “reverse payment” settlements involve no sales. Finally, the dissent’s suggestion that every cash payment would need exhaustive scrutiny sells short the capabilities of the United States’ legal system. It is unlikely that under either a rule of reason, quick look or per se analysis that a settlement, say perhaps for $10 million against a patent generating hundreds of millions of dollars for the patentee, or one where there is some sort of exchange of valuable consideration would require exhaustive and protracted discovery and litigation in every instance.

IX. California, The Cartwright Act, and In re Cipro

In AndroGel the US Supreme Court rejected the scope of the patent test in favor of antitrust scrutiny for pay for delay patent settlements utilizing a rule of reason approach.  Left open for question is California’s reaction to the AndroGel decision. The California Supreme Court will very soon have an opportunity to review and consider a significant pay for delay settlement agreement entered into between the patent holder and four generic companies in the Cipro I and II Cases.[186]

Those cases involve defendants Bayer AG and Bayer Corp. (“Bayer”) who held the patent to the drug Cipro. Faced with the potential of losing a patent infringement trial in which claims of unenforceability were being made, Bayer paid $398.1 million in exchange for the generics agreement not to launch a generic Cipro. At the time of the agreement Bayer had six years remaining on the patent. The amount Bayer paid was more than the potential profits the generics combined would have earned had they entered the market and competed. After making this large payment Bayer increased the price of Cipro by 16% to consumers.  In the end, Bayer and the generic companies gained by sharing monopoly profits and consumers lost by paying higher prices.  California law and policy dictate that payment to delay generic entry should be declared presumptively illegal, and in that respect is less accommodating that federal antitrust law.

In general the Cartwright Act broadly declares unlawful any “trust,” which is defined as a combination of capital, skill, or acts by two or more persons, firms, partnerships, corporations, or associations of persons to restrict trade, limit production, increase of fix prices, or prevent competition.[187] The Act has long outlawed anticompetitive behavior in categorical terms and makes agreements restraining free competition void.[188] . For example, the Act flatly prohibits all agreements between businesses “to pool, combine or directly or indirectly unite any interests that they may have connected with the sale or transportation of any such article or commodity, that its price might in any manner be affected.”[189] Pay for delay agreements, like the Cipro agreement, are clearly made to prevent a competitor from entering the market and would run afoul with California’s per se prohibition on agreements uniting competitors to affect price. Horizontal agreements between competitors to preclude competition have long been condemned under California law. [190]

In Cianci v. Superior Court, the California Supreme Court stated that the Cartwright Act is “broader in range and deeper in reach than the Sherman Act,” and that it “reaches beyond the Sherman Act to threats to competition in their incipiency much like section 7 of the Clayton Act.”[191] More recently, in Clayworth v. Pfizer, the California Supreme Court again touted the broad expanse of the Cartwright Act which it said is intended in the broadest sense to eliminate these competitor collusions, to promote free competition in all classes of business in this State, and to ensure “maximum deterrence and disgorgement” of profits generated by antitrust violations.[192]

California law also abhors covenants not to compete, unlike federal law which tolerates such covenants and treats them under a loose rule of reason rule. Thus California Business and Professions code section 16600[193] provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”[194]  The statute’s use of “every contract” has been held to indicate that it was intended to “apply to any sort of contract which contains a covenant restraining competition.”[195] More importantly, the California Supreme Court found that “section 16600 represents a strong public policy of the state which should not be diluted by judicial fiat” and specifically rejected federal courts’ efforts to temper it with a “reasonable” limitation.[196] Section 16600 was enacted to promote competition and is part of California’s antitrust laws, and is both independent of and supplemental to the Cartwright Act.[197] The section reinforces California’s strong hostility to noncompetition pacts such as reverse payment agreements.

California has enacted several statutes favoring reduction of prescription drug prices, mandating greater use of generic drugs and fostering generic competition. These statutes further reinforce the need to treat reverse payment agreements as unlawful under the Cartwright Act. For example, the Government Code prescribes cost savings strategies “for the state to achieve savings through greater use of generic drugs” and requires state entities to share information and strategies to that end. [198] A host of other statutes seeks to implement the State’s pro-generic competition policy, including for instance, Business and Professions Code that allows pharmacists to substitute generic drugs without contacting the prescribing physician[199]and requires pharmacies to post conspicuous notifications concerning pricing and generic substitution possibilities;[200] the Labor Code that requires worker’s compensation providers to use generic drugs;[201] and the Health and Safety Code that was intended to “make prescription drugs more affordable,” and provide greater discounts for generic drug purchases by low-income residents.[202]  These laws express our State’s manifest preference to increase generic drug competition to help arrest escalating drug prices, a preference that must inform the Cartwright Act analysis of reverse payment agreements.

California case law also supports a true antitrust scrutiny of reverse payment settlements and the scope and validity of the patents on which they are based. Thus for example, in Vulcan, the California Supreme Court invalidated a horizontal market allocation contract between competitors who claimed they were merely exchanging their patent rights to dynamite.[203] The Court made it clear that simply holding a patent does not give a company free rein to enter anticompetitive contracts, including market allocation contracts, with competitors.[204] In Fruit Machinery, the Court stated that manipulation for anticompetitive purposes of a contract involving patent rights can violate the Cartwright Act, even if the contractual provisions remain fully within the scope of the patent.[205]  Nor does California law accord the uncritical deference to a policy that favors settlements as does federal law.  In settling litigation, California law for instance, “does not allow a court to endorse a provision in a settlement agreement or stipulation which is illegal, contrary to public policy, or unjust….[c]onsequently, even though there is a strong public policy favoring settlement of litigation, this policy does not excuse a contractual clause that is otherwise illegal or unjust.”[206]

Given these California statutes and California’s case law, and its strong policies and legislation that encourage generic competition, it could be expected that California courts might embrace a position and remedy along the lines advocated by the Federal Trade Commission.

X. Conclusion

 The Supreme Court decision in AndroGel is a victory for consumers. For the past decade, the law of the different circuits changed from per se violation to the scope of the patent test which was translated into a presumptively lawful test. AndroGel has now changed the landscape, establishing that patents are no longer blank licenses to disregard antitrust laws. Furthermore, while the policy favoring settlements is still important, reverse payment settlement agreements will not escape antitrust scrutiny. Third, companies that enter into reverse payment settlement agreements with the payment of money or any other consideration, however well-disguised, will need to show procompetitive effects to escape antitrust liability.

AndroGel rejects the treatment of patent law, antitrust law, and settlement agreements as isolated islands of law. The Supreme Court correctly recognizes and restores American antitrust law to its rightful place among multiple fields of law all as part of the larger system of jurisprudence to the benefit of the consumer and in favor of competition and innovation. Furthermore, California’s antitrust laws and unfair competition laws are broader than the Sherman Act. The California Supreme Court should adopt a per se standard in analyzing pay-for-delay settlements as it is consistent with California principles of law, its stated public policy, and the protection of its consumers and businesses.

 


* Ralph B. Kalfayan is a principal at Krause Kalfayan Benink & Slavens, LLP, located in San Diego, California. Mr. Kalfayan’s primary practice areas include antitrust, business and consumer protection litigation.

** Vic A. Merjanian is an associate at Krause Kalfayan Benink & Slavens, LLP, located in San Diego, California. Mr. Merjanian’s primary practice areas include antitrust, business and consumer protection litigation.

[1] Fed. Trade Comm’n v. Actavis, Inc. et al., No. 12-416, 2013 WL 2922122 *5 __ U.S. __(U.S.Sup.Ct. June 17, 2013) (hereinafter “AndroGel” or “Actavis”).

[2] William C. Holmes, “Reverse Payment” Settlement Agreements, Intell. Prop. & Antitrust L. § 38.3 (2013).

[3] Drug Price Competition and Patent Term Restoration Act of 1984, 21 U.S.C. § 355 (2013) (hereinafter “Drug Price Act”).

[4] In re K-Dur Antitrust Litigation, 686 F.3d 197, 203 (3rd Cir. 2012) (hereinafter “K-Dur”).

[5] Id.

[6] Id. at 203 (internal citations omitted); see also § 355(j)(2)(A)(vii)(IV) of the Hatch-Waxman Act.

[7] Id. (internal citations omitted). This is called a paragraph IV certification. It can also satisfy this requirement by certifying: “(I) that such patent information has not been filed, (II) that such patent has expired, [or] (III) by certifying the date on which such patent will expire . . .” Id.

[8] Id. at 204.

[9] Filing such an infringement suit triggers an automatic stay which “prevents the FDA from approving the generic drug until the earlier of (1) thirty months have run or (2) the court hearing the patent challenge finds that the patent is either invalid or not infringed.” § 355(j)(5)(B)(iii)(I).

[10] K-Dur, at 204 (quoting 21 U.S.C. § 355(j)(5)(B)(iv)).

[11] AndroGel, at *5.

[12] K-Dur, at 204 (quoting H.R. Rep. No. 98-857(I), at 14-15, reprinted in 1984 U.S.C.C.A.N. 2647-48).

[13] William C. Holmes, Introduction, Intell. Prop. & Antitrust L. § 51 (2013).

[14] “It is as important to the public that competition should not be repressed by worthless patents, as that the patentee of a really valuable invention should be protected in his monopoly.” United States v. Glaxo Group, 410 US 52, 58 (U.S. 1973), quoting Pope Mfg. Co. v. Gormully, 144 U.S. 224, 234 (U.S. 1892).

[15] Drug Price Act, 21 U.S.C. § 335(j)(5)(B)(iv), supra.

[16] Gifford, Antitrust’s Troubled Relations, citing Nat’l Collegiate Athletic Ass’n, 468 U.S. at 107; Ariz. V. Maricopa County Med. Soc’y, 457 U.S. 332, 367 (U.S. 1982) (Powell, J., dissenting); Reiter v. Sonotone Corp., 442 U.S. 330, 343 (U.S. 1979) (“the purpose of antitrust law is to advance consumer welfare.”).

[17] Majority’s View: a reverse payment (or pay-for-delay) settlement agreement falls in the overlap, thus, scrutinizing it under antitrust law would not frustrate patent law.

[18] Dissent’s View: any antitrust scrutiny of reverse payment settlements would necessarily frustrate patent law objectives.

[19] Note the K-Dur Court’s comments that “[m]any patents issued by the PTO are later found to be invalid or not infringed” as it cites “a 2002 study conducted by the FTC [that] concluded that, in Hatch-Waxman challenges made under paragraph IV, the generic challenger prevailed seventy-three percent of the time.” K-Dur, at 215 (internal citations omitted).

[20] FTC Staff Study, Pay-for-Delay: How Drug Company Pay-Off Cost Consumers Billions, (January 2010) available at http://www.ftc.gov/os/2010/01/100112payfordelayrpt.pdf;          Chart available at http://www.ftc.gov/os/2010/07/100727pfdagree.pdf.

[21] Id. at 8.

[22] Jon Leibowitz, Chairman, Fed. Trade Comm’n, Speech at the Center for American Progress: Pay-for Delay Settlements in the Pharmaceutical Industry, June 23, 2009.

[23] U.S. PIRG, “Top Twenty Pay-For-Delay Drugs: How Drug Industry Payoffs Delay Generics, Inflate Prices and Hurt Consumers,” Cmty. Catalyst, p. 3 (2013).

[24] Kaiser Family Foundation, California: Total Retail Sales for Prescription Drugs Filed at Pharmacies, available at http://www.statehealthfacts.org/profileind.jsp?cmprgn=1&cat=5&rgn=6&ind=266&sub=66 (as of July 25, 2013). The 2006 data is in the archives of the Kaiser Family Foundation.

[25] California Health Foundation, Health Care Almanac, Health Care Costs 101 at 9-10 (2011), available at http://www.chcf.org/~/media/Media%20LIBRARY%20Files/PDF/H/PDF%20HealthCareCosts11.pdf (as of July 25, 2013) [calculated at $250 billion in prescription drug spending divided by 16% of state and local government contributions].

[26] Medicaid.gov, Medicaid Drug Rebate Program Data-State Utilization Data, available at http://www.medicaid.gov/Medicaid-CHIP-Program-Information/By-Topics/Benefits/Prescription-Drugs/Medicaid-Drug-Rebate-Program-Data.html (as of July 25, 2013).

[27] C. Scott Hemphill, An Aggregate Approach to Antitrust: Using New Data and Rulemaking to Preserve Drug Competition (May 2009) 109 Columbia L. Rev. 629, 650 fn.6, 651-53. A recent Federal Trade Commission (FTC) study concluded that these agreements are projected to cost Americans some $35 billion from 2004-14. FTC Release, FTC Study Finds that in FY 2012, Pharmaceutical Industry Continued to Make Numerous Business Deals that Delay Consumers’ Access to Lower-Cost Generic Drugs Study (Jan. 17, 2013).

[28] Kaiser Family Foundation, Prescription Drug Trends, May 2010 Fact Sheet (2010) at 1-3 available at http://www.kff.org/rxdrugs/3057.cfm (as of July 25, 2013); Center for Drug Evaluation and Research, U.S. Food and Drug Administration, Generic Competition and Drug Prices, available at http://www.fda.gov/AboutFDA/CentersOffices/OfficeofMedicalProductsandTobacco/CDER/ucm129385.htm (as of July 25, 2013).

[29] Note, Bayer who raised the price of Cipro by 16 percent after the reverse payment agreement was reached. Brief of Appellants, July 1, 2010, Cipro, No. D056361 (“Cipro Appellants’ Brief”), at pp. 20-21. Palmer v. BRG of Georgia, Inc., 498 U.S. 46 (1990) (condemning an agreement between competing providers of bar review services pursuant to which one paid the other to refrain from competing in Georgia. In support of its condemnation, the Court noted that once the agreement was made, the remaining provider raised its prices significantly).

[30] Appellants’ Appendix, Cipro, D056361, Vol. 5 at p. 1093.

[31] Lipitor is a prescription pharmaceutical drug used  to reduce LDL cholesterol levels.

[32] Cynthia A. Jackevicius, Pharm.D. et al, Generic Atorvastatin and Health Care Costs, N Engl J Med 366:3, p. 201 (Jan. 19, 2012).

[33] Id.

[34] Id. at 202.

[35] Id. (Market share of statin drugs and projected shifts in market share upon generic entry.)

[36] Id.

[37] Id.

[38] Id.

[39]K-Dur, 686 F.3d 197, 203.

[40] Id.

[41] Id. at 204 (quoting H.R. Rep. No. 98-857(I), at 14-15, reprinted in 1984 U.S.C.C.A.N. 2647-48).

[42] Id. citing 21 U.S.C. § 355(j)(5)(B)(iv).

[43] Id. at 203 (internal citations omitted); see also § 355(j)(2)(A)(vii)(IV) of the Hatch-Waxman Act.

[44] Id. (internal citations omitted).

[45] Id. at 204.

[46] Id. citing § 355(j)(5)(B)(iii)(I).

[47] In AndroGel, the Supreme Court in its majority opinion, confronts the question of whether a “high reverse payment signal[s] to other potential challengers that the patentee lacks confidence in its patent, [and] thereby provoke[es] additional challenges, perhaps too many for the patentee to ‘buy off?’” Androgel, at *10. The Supreme Court cites two features of the Hatch-Waxman Act that address these issues: (1) “only the first challenger gains the special advantage of the 180 days of an exclusive right to sell a generic version of the brand-name product,” and (2) “a generic that files a paragraph IV after learning that the first filer has settled will (if sued by the brand-name) have to wait out a stay period of (roughly) 30 months before the FDA may approve its application, just as the first filer did.” Id. at *10-11. The Supreme Court reasoned that these “features together mean that the reverse payment settlement with the first filer (or, as in [the case of AndroGel] all of the initial filers) removes from consideration the most motivated challenger, and the one closest to introducing competition.” Id. at *11 (internal citations and emphasis omitted).

[48] Andrx Pharm., Inc. v. Biovail Corp., 256 F.3d 799, 803 (D.C.Cir. 2001).

[49] Id.

[50] Id.

[51] Id.

[52] Id.

[53] Id. at 805.

[54] Id. at 804.

[55] Id. at 811.

[56] Id. at 813.

[57] Id. at 809.

[58] Id.

[59] In re Cardizem CD, 332 F3d 896, 900 (6th Cir. 2002) (hereinafter “Cardizem”).

[60] Id. at 900, 904-905.

[61] Id. at 900.

[62] Id. at 915.

[63] Id. at 906 (quoting State Oil Co. v. Khan, 522 U.S. 3, 10 (U.S. 1997).

[64] Id. (quoting Arizona v. Maricopa Cty. Medical Soc., 457 U.S. 332, 344, 351 (U.S. 1982) (the anticompetitive potential inherent in all price-fixing agreements).

[65] Id. at 907 (quoting Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 50 n.6 (U.S. 1977)).

[66] Id. at 907.

[67] Id. at 915.

[68] Valley Drug Co. v. Geneva Pharm., Inc., 344 F.3d 1294, 1298 (2003) (hereinafter “Valley Drug”).

[69] Id. at 1300.

[70] Id.

[71] Id.

[72] Id. at 1296.

[73] Id. at 1304.

[74] Id. at 1305.

[75] Id. at 1306 (quoting In re Ciprofloxacin Hydrochloride Antitrust Litig., 261 F. Supp. 2d 188, 249 (E.D.N.Y. 2003) (“when patents are involved…the exclusionary effect of the patent must be considered before making any determination as to whether the alleged restraint is per se illegal.”)).

[76] Id. at 1306.

[77] Schering-Plough Corp. v. Fed. Trade Comm’r, 402 F.3d 1056 (11th Cir. 2005) (hereinafter “Schering-Plough”).

[78] Id. at 1058-1059.

[79] Id. at 1059.

[80] Id. at 1060.

[81] Id. at 1060-1061.

[82] Id.

[83] Id. at 1061.

[84] Id.

[85] Id. at 1058, 1063.

[86] Id. at 1076 (citing, see Valley Drug., 344 F.3d 1294 (simply because a brand-name pharmaceutical company holding a patent paid its generic competitor money cannot be the sole basis for a violation of antitrust law, underscoring the need to evaluate the strength of the patent)).

[87] Id. at 1063 (quoting Universal Camera Corp. v. NLRB, 340 U.S. 474, 487-88 (1951) (holding the plain language of the statute required a review of the record as a whole, and if the reviewing court cannot reach the same conclusion as the administrative fact-finder, the administrative decision must be reversed)).

[88] Id. at 1065-1066 (quoting Valley Drug, 344 F.3d at 1312).

[89] Id. at 1068.

[90] Id. at 1066 (quoting Dawson Chem. Co. v. Rohm & Haas Co., 448 U.S. 176, 215 (U.S. 1980)); see Valley Drug at 1304.

[91] Schering-Plough, at 1066, (quoting Telecom Technical Services Inc. v. Rolm Co., 388 F.3d 820, 828 (11th Cir.2004)).

[92] Id. at 1068-1069, 1070 (quoting Universal Camera, 340 U.S. at 487-488, 496 (1951); see also Equifax Inc. v. FTC, 678 F.2d 1047, 1052 (11th Cir. 1982)).

[93] Schering-Plough, at 1071.

[94] Id. at 1076.

[95] Id. at 1072-1073 (quoting Aro Corp. v. Allied Witan Co., 531 F.2d 1368, 1372 (6th Cir. 1976)).

[96] Id. at 1073.

[97] Id. at 1074-1075, see also In re Ciprofloxacin Hydrochloride Antitrust Litigation, 261 F.Supp.2d 188, 250-52 (E.D.N.Y.2003); Asahi Glass Co., Ltd. v. Pentech Pharms., Inc., 289 F. Supp. 2d 986, 994 (N.D. Ill. 2003).

[98] In Re: Tamoxifen Citrate Antitrust Litig., 466 F.3d 187 (2005) (hereinafter “Tamoxifen”).

[99] Id.

[100] Id. at 192-193.

[101] Id. at 194.

[102] Id.

[103] Id. at 190, 196-197.

[104] Id. at 213, (quoting Cipro III, 363 F.Supp.2d at 535).

[105] Id.

[106] Id. at 211.

[107] Id. at 212.

[108] Id. at 221, 232, (as to point one, citing principally Whitmore v. Arkansas, 495 U.S. 149, 159-60 (U.S. 1990)).

[109] Id. at 228, (quoting Clorox Co. v. Sterling Winthrop, Inc., 117 F.3d 50, c (2d Cir.1997)).

[110] Tamoxifen, at 228.

[111] Id., at 232.

[112] Id. (quoting Schering-Plough, at 1058; and In re Ciprofloxacin Hydrochloride Antitrust Litig., at 517).

[113] In re Ciprofloxacin Hydrochloride Antitrust Litig., 544 F3d 1323, 1328 (2008) (hereinafter “Cipro”).

[114] Id.

[115] Id.

[116] Id.

[117] Id.

[118] Id.

[119] Id.

[120] Id. at fn.5.

[121] Patents obtained by fraud against the Patent Trademark Office may be actionable under our antitrust laws. These claims are commonly referred to as Walker Process claims, named after the seminal case of Walker Process Equip., Inc. v. Food Mach. and Chem. Corp., 86 S.Ct. 347 (U.S. 1965) (hereinafter “Walker”). In Walker Process, the court held that “enforcement of a patent procured by fraud on the Patent Office may be violative of section 2 of the Sherman Act provided the other elements necessary to a section two case are present. Walker, at 349.

[122] Cipro, at 1333.

[123] Id.

[124] Id.

[125] Ark. Carpenters Health & Welfare v. Bayer AG, 604 F3d 98, 108 (2010).

[126] Id.

[127] Id. at 109.

[128] K-Dur, 686 F.3d, at 203.

[129] Id.

[130] Id.

[131] Id. at 218.

[132] Id.

[133] Id. at 209.

[134] K-Dur, at 214-215.

[135] Id. at 214, (quoting see Stratoflex, Inc. v. Aeroquip Corp., 713 F.2d 1530, 1534 (Fed.Cir. 1983)).

[136] Id. at 216 (quoting United States v. Studiengesellschaft Kohle, m.b.H., 670 F.2d 1122, 1136 (D.C.Cir. 1981)).

[137] William C. Holmes, Rule of Reason v. Per Se, Intell. Prop. & Antitrust L., p. 1 (2013) (hereinafter “Rule of Reason”).

[138] See generally, AndroGel, 2013 WL 2922122, *13.

[139] Holmes, Rule of Reason, at 1.

[140] Id.

[141] Id. at 1-2.

[142] Id.

[143] John J. Miles, Elements of a Section 1 Violation-Unreasonably Anticompetitive Effect-The Rule of Reason, 1 Health Care and Antitrust L. § 2A:11 (2013).

[144] Id.

[145] Id.

[146] Id.

[147] Id.

[148] Id., see also Golden Gate Pharmacy Services, Inc. v. Pfizer, Inc., 2010-1 Trade Cas. (CCH) ¶76988, 2010 WL 1541257 (N.D. Cal. 2010).

[149] Id., referencing K.M.B. Warehouse Distrib., Inc. v. Walker Mfg. Co., 61 F.3d 123 (2d Cir. 1995), and Craftsmen Limousine, Inc. v. Ford Motor Co., 491 F.3d 380, 388.

[150] Id., referencing Broadcast Music, Inc. v. Columbia Broadcasting System, Inc., 441 U.S. 1 (1979), and F.T.C. v. Indiana Federation of Dentists, 476 U.S. 447 (1986), and National Collegiate Athletic Ass’n v. Board of Regents of University of Oklahoma, 468 U.S. 85 (1984).

[151] For example, large unjustified payments will bring with it the risk of anticompetitive effects. AndroGel, at *13. Brand and generic companies profit to the detriment of consumers. Id. at *10.

[152] Jeffrey M. Cross, “Pay for Delay” Pharmaceutical Settlements and the “Quick Look” – What Does it All Mean?, Westlaw Journal Antitrust (2013); also citing, In the Matter of Massachusetts Board of Regulation in Optometry, 110 F.T.C. 549 (1988), and Polygram Holding, Inc. v. Fed. Trade Comm’n, 416 F.3d 29 (D.C. Cir. 2005).

[153] Note that when using the structured rule of reason, what is sufficient to constitute a prima facie case establishing anti-competitive effect has not been resolved by the Supreme Court.

[154] Id.

[155] Id.

[156] Id.

[157] Id.

[158] AndroGel, at *14.

[159] Id. at *13.

[160] William C. Holmes, “Quick Look”, Intell. Prop. & Antitrust L., § 5:8 (2013).

[161] Id.

[162] Id.

[163] Id., citing National Collegiate Athletic Ass’n v. Board of Regents of University of Oklahoma, 468 U.S. 85, 99-100 (U.S. 1984).

[164] Holmes, “Quick Look”, citing California Dental Ass’n v. FTC., 526 U.S. 756, 770 (U.S. 1999).

[165] Id.

[166] Id. at *5.

[167] Id.

[168] The Majority in AndroGel discusses the interaction between a patent and potential market injury vis-à-vis exclusion. Specifically, it highlights that “exclusion may permit the patent owner to charge a higher-than-competitive price for the patented product. But an invalidated patent carries with it no such right. And even a valid patent confers no right to exclude products or processes that do not actually infringe. The paragraph IV litigation […] put[s] the patent’s validity at issue, as well as its actual preclusive scope.” AndroGel, at *8.

[169] David U. Himmelstein, Deborah Thorne, Elizabeth Warren & Steffie Woolhandler, Medical Bankruptcy in the United States, 2007: Results of a National Study, 122 Am. J. Med. 741-746 (August 2009) (discussing causes of bankruptcy in the United States and the role medical expenses play in said bankruptcies).

[170] Androgel, at *14.

[171] Id. at *10.

[172] Id. Here the Supreme Court offers an example where “the exclusive right to sell produces $50 million in supracompetitive profits per year for the patentee. And suppose further that the patent has 10 more years to run. Continued litigation, if it results in patent invalidation or finding of noninfringement, could cost the patentee $500 million in lost revenues, a sum that then would flow in large part to consumers in the form of lower prices.” Id. The Supreme Court properly recognizes that the zero-sum nature of the pharmaceutical market, given that the goods purchased can be fairly described as existing more or less in inelastic demand given the medications are for health purposes and not for discretionary entertainment purposes. As such, every dollar of profit shared through monopoly profit sharing comes directly out of the pocket of a sick American.

[173] Id. at *11. The Supreme Court acknowledges that there may exist other justifications. Specifically, “[w]here a reverse payment reflects traditional settlement considerations, such as avoided litigation costs or fair value for services, there is not the same concern that a patentee is using the monopoly profits to avoid the risk of patent invalidation of a finding of noninfringement. In such cases, the parties may have provided for a reverse payment without having sought or brought about the anticompetitive consequences we mentioned above.” Id.

[174] Id. Here, the Supreme Court notes that “[a]n important patent itself helps to assure such power.” Id. Furthermore, “[n]either is a firm without that power likely to pay large sums to induce others to stay out of its market.” Id., (internal citations omitted). Of note, studies show “that reverse payment agreements are associated with the presence of higher-than-competitive profits – a strong indication of market power.” Id.

[175] Id. The Supreme Court recognized that “it is normally not necessary to litigate patent validity to answer the antitrust question (unless, perhaps, to determine whether the patent litigation is a sham).” Id. In support, the Supreme Court points out that an “unexplained large reverse payment itself would normally suggest that the patentee has serious doubts about the patent’s survival. Id. The logical deduction in such a scenario is that “the payment’s objective is to maintain supracompetitive prices to be shared among the patentee and the challenger rather than face what might have been a competitive market–the very anticompetitive consequence that underlies the claim of antitrust unlawfulness.” Id. The Supreme Court acknowledges, on balance, that the “owner of a particularly valuable patent might contend […] that even a small risk of invalidity justifies a large payment [… but…] the payment (if otherwise unexplained) likely seeks to prevent the risk of competition.” Id. Thus, in summary, “the size of the unexplained reverse payment can provide a workable surrogate for a patent’s weakness, all without forcing a court to conduct a detailed exploration of the validity of the patent itself.” Id.

[176] Id. at *12. The Supreme Court notes that although “the parties may have reasons to prefer settlements that include reverse payments, the relevant antitrust question is: What are those reasons? If the basic reason is a desire to maintain and to share patent-generated monopoly profits, then, in the absence of some other justification, the antitrust laws are likely to forbid the arrangement.” Id.

[177] The FTC publishes annually an overview of agreements filed. Included in the publication is the chart published below, which describes the number of “Final Settlements,” “Potential Pay-for-Delay” and “Potential Pay-for-Delay Involving First Filers.” Note the increase over the years.

FTC, Agreements Filed with the Federal Trade Commission Under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, available at www.ftc.gov/os/2013/01/130117mmareport.pdf.

[178] Id. at *7.

[179] Id. at *11.

[180] Id.

[181] Id. at *13.

[182] Id.

[183] Id.

[184] Id. at 18.

[185] Id. at *15, citing General Elec. Co., supra, at 488-490.

[186] The merits of In Re Cipro Cases I & II are presently pending before the California Supreme Court, Case No. S198616.

[187] Bus. & Prof. Code §§ 16702, 16720, 16726.

[188] Id. at § 16722.

[189] Id. at 16720(e)(4).

[190] Vulcan Powder Co. v. Hercules Powder Co., 96 Cal. 510 (Cal. 1892) (hereinafter “Vulcan”); see also Nat’l Collegiate Athletic Ass’n v. Board of Regents, 468 U.S. 85, 100 (U.S. 1984).

[191] Cianci v. Super. Ct., 40 C.3d 903 (Cal. 1985).

[192] Clayworth v. Pfizer, Inc., 49 Cal.4th 758, 778-79, 783 (Cal. 2010).

[193] Bus. & Prof. Code § 16600.

[194] Id.

[195] Scott v. Snelling & Snelling, Inc., 732 F. Supp. 1034, 1040 (N.D. Cal. 1990).

[196] Edwards v. Arthur Andersen LLP, 44 Cal4th 937, 949 (Cal. 2008).

[197] Comedy Club, Inc. v Improv West Ass’n, 553 F3d 1277, 1293 n.17 (9th Cir. 2009).

[198] Gov. Code §§ 14977.1(a) and14982(b); Gov. Code §§ 14977.1(a)-14980.

[199] Bus. & Prof. Code § 4073.

[200] Id. at § 4122.

[201] California Labor Code § 4600.1.

[202] Health & Safety Code § 130500, Stats. 2006, c. 619, s.1 (A.B. 2911).

[203] Vulcan, 96 Cal. 510.

[204] Id. at 515-516.

[205] Fruit Machinery Co. v. F. M. Ball & Co., 118 Cal.App.2d 748 (1953).

[206] Timney v. Lin, 106 Cal.App.4th 1121, 1127 (Cal. Ct. App. 2003).